Dollar, yen benefit from further safe-haven flows

Yen is strongest performer despite G7 discomfort

By

WilliamL. Watts

NickGodt

LONDON (MarketWatch) -- The U.S. dollar surged against the euro and the British pound Monday, but lost ground against the resurgent Japanese currency, as safe-haven flows trumped a Group of Seven warning about "excessive" yen volatility.

"Fear continues to grip global markets and traders are piling into whatever safe havens they can find," said James Hughes, analyst at CMC Markets.

The dollar slipped to 92.57 yen in recent trade after touching a session low of 92.02 earlier in the day. That's down from 94.18 late Friday.

The dollar fell as low as 90.90 yen on Friday, the yen's strongest level versus the dollar since August 1995.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 said in a joint statement issued Monday morning. See full story.

"We continue to monitor markets closely, and cooperate as appropriate," they said.

Strategists said the statement shows high potential for coordinated intervention aimed at arresting the yen's strong rise.

French Finance Minister Christine Lagarde reportedly said Monday the G-7 nations don't plan to intervene to sell the yen, but didn't rule out Japanese authorities taking that action.

"We wished to support this possible intervention of Japanese authorities, knowing this would be about a purely Japanese intervention,'' Lagarde said in an interview with Bloomberg News in Montpellier, France.

Asked specifically if the G-7 nations would sell the yen together, she said, "no.'"

According to Ashraf Laidi, chief forex strategist at CMC Markets, the impact of the statement was short-lived as chances that yen-selling would succeed in bringing down the currency are weak.

The currency remains boosted by capital fleeing back to Japan from all major currencies while Japanese investors are keeping capital at home as the Nikkei hits 26-year lows, he said.

On Wall Street, U.S. stocks ended a volatile session in the red, after a late bout of selling heightened risk aversion and added to safe-haven flows. See Market Snapshot.

Stocks were lifted earlier in the session by data showing U.S. home builders took a big step in September toward reducing the gigantic oversupply of homes, boosting sales slightly, slashing prices and reducing the number of unsold homes at a record pace. Sales of new homes rose an estimated 2.7% to a seasonally adjusted annual rate of 464,000, the Commerce Department said. See Economic Report.

Australia intervenes

Separately, the Reserve Bank of Australia said it bought its own currency, the Australian dollar, on Friday and again on Monday, to stem its slide.

The move to support its currency is notable because central banks in developed markets are usually slower to openly intervene in their currencies, though the effect was limited.

The Australian dollar recently traded at 60.21 U.S. cents, down 3.0%.

"Confirmation that the RBA had intervened on Friday and again on Monday helped put a floor" under the Aussie, wrote David Watt, senior currency strategist at RBC Capital Markets in a note to clients.

"However, foreign exchange markets have shown zero interest in lifting the overall downward pressure" on the Australian unit, he said.

Meanwhile, the U.S. dollar lost ground against the Swiss franc, a traditional safe-haven, to change hands at 1.1559 francs, a loss of 1%.

The dollar, however, has enjoyed safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments.

The dollar index
DXY, +0.47%
a measure of the greenback against a trade-weighted basket of six currencies, traded at 87.185, up from 86.545 in North American trade late Friday.

Lower rates in eurozone

The euro came under more pressure after European Central Bank President Jean-Claude Trichet said the ECB may cut interest rates again at its next meeting on Nov.6. See full story.

"As I said, it is possible that we could decrease rates again in the occasion of the next meeting of the Governing Council," Trichet said in remarks prepared for delivery at a conference in Madrid.

A steeper-than-expected October decline in the Ifo business climate index for Germany, Europe's biggest economy, reinforced expectations the European Central Bank will aggressively cut interest rates in coming months, economists said. See full story.

The euro traded at 115.26 yen, down from 119.06 late Friday. Earlier Monday, it fell as low as 113.61 yen.

The euro tumbled to $1.2452 against the dollar from $1.2641 late Friday.

The European unit last week posted a weekly loss of more than 6% against the dollar, bringing its loss for the year to more than 14%.

Steep losses by European shares followed an Asian rout spurred by fears of a global recession. Turmoil in Central and Eastern Europe also added to negative sentiment for the single currency, analysts said.

The International Monetary Fund on Sunday announced a $16.5 billion bailout package for Ukraine and said it had reached agreement on a "substantial" financing package for Hungary. See full story.

Both nations have been hit hard by investor worries about the ability of nations in the region to service high levels of foreign-denominated debt.

Pound slips

The British pound fell to $1.5518 against the dollar, from $1.5875 late Friday. The currency tumbled sharply last week after economic data continued to point to a potentially deep recession.

Sterling has also moved in close correlation to downward moves in equity markets, analysts said.

Upcoming economic data on housing and the retail sector carry the potential to disappoint, but may have little impact on sterling, said strategists at HBOS. That's because financial markets have heavily discounted downside risks, they said.

Instead, "the driver of sterling this week remains the equity markets, (and) only a turnaround in sterling-negative order flow here can help halt the decline" by the pound versus the dollar, they wrote.

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